Equity market linkages across Latin American countries

Abstract

Equity market linkages are of interest to international investors aiming at diversifying their equity portfolio holdings. In fact, the benefit of equity portfolio diversification across different international markets depends on whether markets are integrated or segmented. To discern whether there are any potential benefits to diversification, we investigate the degree of integration across the equity markets of selected Latin American countries (that is, Argentina, Brazil, Chile, Colombia and Peru) by applying dynamic and static cointegration techniques to the largest equity markets of that region. Our aim is to find out whether these equity markets enjoy a long-run relationship as a whole, at the sectoral level, or if they follow different trends. We use weekly equity prices between 2005 and 2023, which marked the end of the Covid-19 pandemic. Our findings suggest that the equity markets are not, as a whole, integrated – with the exception of periods of financial distress. This indicates that there is some potential for international portfolio diversification across Latin American equity markets. On the other hand, our sectoral analysis points to specific diversification opportunities across most of the sectors.